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Facebook Insiders May Limit IPO

Networking company already has more than 1,000 shareholders and a valuation of more than $100 billion.

Facebook Inc. is already trading like a public company as insiders and wealthy investors use private marketplaces to buy and sell stock in the social-networking company ahead of its initial offering.

The shareholder base has grown to more than 1,000, compared with the 50 to 100 investors most companies have when they go public, according to an estimate by Sam Hamadeh, head of research firm PrivCo. Private purchases pushed Facebook’s valuation past $100 billion this month, possibly limiting immediate gains for IPO investors, given that Facebook may seek a $75 billion to $100 billion value.

“Facebook is a blue-chip stock and it’s not even public yet,” said Kevin Landis, portfolio manager for the Firsthand Technology Value Fund in San Jose, California. Facebook jumped as high as $44 this month in private trading, valuing the company at $103 billion and leaving it higher than when Landis bought stock at about $30 to $31 in October. He said he aims to add to his holdings.

While demand for the biggest Internet IPO on record may push the stock even higher when Facebook goes public, private trades through channels such as SecondMarket Inc. and SharesPost Inc. are already making it possible for employees and venture capitalists to cash out. That may have lessened pressure on Chief Executive Officer Mark Zuckerberg to hold an IPO before this year.

Facebook, which filed for an initial share sale this month, has yet to set its price range for the IPO. People with knowledge of the matter said earlier this year that Zuckerberg was weighing a valuation of as much as $100 billion.

The private trading may make Facebook’s debut more like a secondary offering, where holders sell stock in an already public company, said Barry Ritholtz, CEO of FusionIQ, an equities research firm.

“The people buying now at the IPO price are presuming there’s lots of upside -- I’m skeptical,” said Ritholtz, whose firm is based in New York. “There’s a lot of smart money agitating for the highest possible valuation, and they don’t necessarily have the investing public’s best interest at heart.”

Insiders and investors with $1 million of net worth and a salary of more than $200,000 can qualify to buy stock on private marketplaces, according to U.S. Securities and Exchange Commission rules. In an auction this week on SharesPost, Facebook stock had a clearing price of $42, valuing the company at $98 billion.

Higher Value?

Widely traded private companies that held IPOs in 2011 traded at about 25 percent to 30 percent less than their eventual IPO price in the two months prior to going public, according to Ori Bash, a vice president at Pluris Valuation Advisors. Facebook may see a smaller gain because it has been traded more, owned by larger investors and researched more thoroughly than other private companies, Bash said. It’s also possible the shares will continue to surge, he said.

“If these private-market trades are truly reflective of Facebook’s valuation, there’s a possibility that demand for the IPO shares could drive it even higher than its anticipated $100 billion valuation,” Bash said.

LinkedIn Corp., which had 560 shareholders of record as of April 15, 2011, was valued at $35 a share in private trading in March of that year, two months before the IPO. The company’s initial public offering priced 29 percent higher in May at $45, giving it a valuation of $4.25 billion. Shares more than doubled to close at $94.25 on the first day of trading.

The shareholders who got into Facebook earliest --including the hundreds of employees who received restricted stock units as part of their compensation packages -- will see the most gains, said Larry Albukerk, a broker of private securities.

Based on private-market trading, Facebook is “realizing full value at the IPO, which is the goal of all companies,” he said. “They don’t want to leave money on the table. Do the RSU holders and current shareholders benefit? Absolutely.”

Private markets have emerged since the tech boom of the late 1990s and Google Inc.’s IPO in 2004. SharesPost, based in San Bruno, California, began in 2009, and SecondMarket predates SharesPost, offering private share transactions since 2008. Since the start of the service, New York-based SecondMarket’s private-market stock trades have topped $1 billion. Facebook is planning to raise $5 billion with its IPO.

While the private markets are giving investors a better idea of where the public market prices shares, they don’t completely replicate the Nasdaq Stock Market or New York Stock Exchange, said Landis, the portfolio manager.

“The idea that it should give you the perfect indication on price -- i.e. there would be zero bounce because it’s perfectly priced in -- I’m not sure I’d buy that,” he said.

Facebook’s sales surged 88 percent to $3.71 billion in 2011, according to the IPO filing, and may climb to $6.1 billion this year, EMarketer Inc. estimates show.

At $100 billion, the company would be valued at about 27 times last year’s sales, almost double the 14.5 times trailing 12-month sales at which professional-networking service LinkedIn Corp. went public in May. It’s almost triple the multiple of 9.8 times implied by online coupon-company Groupon Inc.’s IPO price in November, and four times social-gaming provider Zynga Inc.’s multiple of 6.8 times at its December IPO, Bloomberg data show.

Facebook has 1,070 Class B shareholders based on its latest filing, almost double the tally for LinkedIn ahead of its IPO, according to regulatory filings.

“Arguably, given the number of investors that are already in Facebook, that IPO has already occurred,” Mark Mahaney, an analyst at Citigroup Inc., said in an interview on Bloomberg Radio this month.

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